The timing trap

In One Sentence

Market timing means trying to sell at the highs and buy at the lows. It sounds smart, but over the long run it usually loses to the people who simply stay in the market.

Why It Matters

Stock markets rise over the long run. When you dodge a decline, you often miss a big stretch of the rise as well, and compounding gets interrupted. I've taken this detour twice: once when I believed indicators could catch a bubble's peak, and once when I tried to time long-term US bonds around rate hikes and cuts. Looking back, I was wrong both times.

One Number

Keeping 10% to 20% of each month's money in cash and waiting for a 15% to 30% fall before investing it left you with less wealth than investing everything every month: 0.6% to 5.7% less in the US, 2% to 6% less in Japan, and anywhere from 0.3% more to 5.6% less in Taiwan (author's backtests · Chapter V).

In the Book

Chapter IV reminds you that understanding cycles isn't about guessing the top. Sections 3 and 6 of Chapter V use backtests to put "waiting for a dip" and "sell when pricey" to the test. The Appendix records how I tried to time long-term US bonds.

Go Further

• "Sell when pricey" backtest "Sell when pricey" lost to holding in the US, Japan and Taiwan alike — the most direct evidence there is.
• Compounding Compounding hates being interrupted, and every time you sell out of the market, you interrupt it.
• The cost of trading The more often you trade, the faster your money flows to brokers, the government and whoever is on the other side of the trade.
• Burton Malkiel Malkiel reminds us that no one can predict the market consistently.
• Buying in crashes Adding more in a crash uses new income, not cash you've hoarded while waiting for a crash.